Shooting Retirees in a Barrel - Impact of Stock Spam

Short-sellers and stock promoters have puzzled for years over who operated one of the largest penny-stock websites. A U.S. lawsuit points to a Bugatti-driving 26-year-old from Montreal.

John Babikian used an e-mail list called AwesomePennyStocks to tout a coal company’s stock while dumping his own shares, the Securities and Exchange Commission said last week in a civil complaint. AwesomePennyStocks’ messages about that firm and 38 others, sent over five years, helped fuel spikes in share prices that boosted the combined value of the stocks by as much as $3 billion, according to data compiled by Bloomberg.

Bulk e-mails have long-since supplanted the boiler rooms of the 1990s as the most effective way to hype shares of little-known companies. The value of a prescription-drug distributor that AwesomePennyStocks promoted in 2012 ballooned by more than $700 million within two months. After the messages stopped, the shares collapsed.

...

AwesomePennyStocks built a list of subscribers with keyword advertising on search engines, bidding up the price of phrases like “penny stocks” to more than $2 a click, Nicosia said. Its e-mails generated the most stock buying in the industry, he said.

Bag Holders

“The sheep that buy end up holding the bag and losing everything,” said Randall Place, a lawyer who used to investigate penny stocks for a predecessor of the Financial Industry Regulatory Authority.

AwesomePennyStocks promoted at least 39 companies since 2009, according to e-mails sent to investors and reviewed by Bloomberg News. They included Calgary-based mining firms and a company in Scottsdale, Arizona, that owned medical-marijuana dispensaries. Another company in Boca Raton, Florida, sought to “redefine human donor organ procurement,” according to a 2011 statement.

The value of the 39 stocks increased by more than $3 billion during the days AwesomePennyStocks was promoting them. Most of the shares now trade for less than 1 cent each. The SEC accused Babikian of inflating the value of one of those stocks.

I have posted a coupletimes on the TMFStockSpam experiment run by Seth Jayon and John Keeling. CAPS is basically a fantasy stock picking game, which works like fantasy baseball or football or whatever, and so you pick a stock like Disney and either virtually "buy" it or "sell" it. If either way you decide beats the S&P 500 then you get points.

Currently there are over 75,000 players buying and selling stocks in the game. The player TMFStockSpam was created to track the performance of stocks mentioned in spam stock emails (step 1 in pump and dump). Brian Richards has a great write up on the stomach churning lengths people go to in this seedy business - "I am on a regular basis offered compensation to write about multiple firms."

How do these sites get people to buy in the first place? Well with tales of big winners and Eldorado, of course, but Brian Richards checked some of the claimed winners-

For starters, the pumpers do a masterful job at insinuating massive profits from a small initial sum. One constant: empty promises of 1,000%-plus gains in a matter of weeks. For example, PreferredPennyStocks.com touts a stock's 2,200% gain on its homepage... but that stock is currently trading for less than 1 cent."

How has TMFStockSpam done? Well, of course, the account does not "buy" stocks, it "shorts" stocks, in other words the player sells the stocks mentioned in the inbound email, the same way a pump and dump operator would do.

For each of its "picks" TMFStockSpam helpfully includes the hyperbolic inbound email pitch, sample:

Our New Play is: **RJDG** RJD Green Inc.

*** Hello Everyone,

Do you have RJDG on your Radar for Today?? This play could do well with positive momentum today so make sure it is on the top of your watch list....... Hopefully RJDG will be the play that finishes this week off in style!!

...insert 1,000 words on the "groundbreaking opportunity" and call to action...

In the fantasy game, the way you score points is to beat the market, and in year 5 of an epic bull market that is no easy target. Lots of smart, capable and honest investors can't do it, So how has TMFStockSpam done? The player has made 210 stock picks (all sells) from April 2009 till now. Currently, by my count the TMFStockSpam player has beaten the market on 194 picks and trails in 16 picks. Now some context, if you do not spend much time thinking about the market you may be nonplussed, but investing is a business where if you are right 60% of the time you can get very rich. A record of 194-16 is staggering. In the real world, 93% accuracy does not happen, even Warren Buffett has a clunker now and then (usually involving buying stock in airlines). There is no investing strategy that is right 93% of the time.

The problem of course is that its not an investing record, its fleecing innocent victims, retirees, and so on.

93% accuracy in a game where 60% makes you legend. Its shooting fish in a barrel, but sadly its actually shooting retirees in a barrel.

In the previous example, the hyperventilating stock pitch recommended buying RJDG in November at $0.03/share. Among the numerous claims - "Restructuring of Silex has been completed in 2013, and franchising will be created in 2013. 2014 is forecast at $4,098,520 annually per established store (year two of operation) with EBITDA of $614,778." But while the people who followed the advice did get to "participate in the restructuring", they did not benefit - there are not many numbers lower than $0.03 but one number is - the current price of $0.00.

This is just one of the 194 similar examples in TMFStockSpam's 5 year history. Its not small feat to trounce the market in the idst of an epic bull run by hundreds of points. I think at least part of the appeal for the buyer that the pump and dumpers feed on is the behavioral aspect of anchoring on the price, well $0.03 does not sound like much, how much could I lose? Answer: all of the money you put into it.

Recent picks/sells by TMFStockSpam

If you wonder where the money came from to buy the Bugattis, the answer is right in the TMFStockSpam player ranking - out of 75,588 players TMFStockSpam ranks in 7th place.